Advantages of applying to multiple programs at same institution
Hedge your bets: for those that have less than ideal application profile, it may make more sense to apply to as many programs as you can. Included in the increased program application style is the trick of applying to 2 or 3 specialties at once. One must be careful though because just applying to 2 specialties is not enough to garner numbers, the applications should also be tailored for the same. For example if you are going to apply to internal medicine as a primary specialty and then apply to psychiatry as back up then your individual applications to these specialties should reflect a certain level of interest. I have done an article which analyses the relationship between the level of interest demonstrated by the applicant and the correlation with the interview success. If you have a not so strong application profile and you want to play to the your advantage and not place all your chances in one basket, then applying to multiple specialties and even apply to 2 programs in same institution may be a fair option.
Good for folks who have geographical restrictions: sometimes applicants are severely restricted to places they can apply for personal reasons. Many have family, which precludes them from applying in other states, and the number of institutions that one can apply to is limited. Thus, in this case, It makes sense to apply to as many spots in the constrained geographic area to increase the chances
Disadvantages of applying to multiple programs at same institutions
Possibility of being found out: one thing that most applicants struggle with are what if the program directors find out that the applicant has applied to another specialty in the same institution. What are the implications and the consequence of this? Will it affect my chances of interview adversely? There are 2 approaches to answer that: the theoretical approach and the pragmatic approach. Theoretically, it is possible that the programs and the faculty discover that an applicant has applied to 2 programs in the same institution. This may be a more of a possibility in very small institutions, which interview few hundred applicants in toto. For large programs, which interview several thousand applicants, this may not be such a problem. There is however, a real risk that the program director may see this as being not committed to the specialty and would adversely affect the chances of matching. The practical approach is that the likelihood of this happening is very small and should not affect your choice of programs. If there is a situation where you are asked to explain why you have applied to 2 programs in the same institution, you can use one of the reasons above and state your case. Programs may be sympathetic to applicants who have a need to be focused in a particular location or institution.